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People with bank accounts in Cyprus were shocked Saturday to learn that as part of an agreement reached with international creditors, the government has imposed a tax on all deposits to help bail out the nation and its banks.

While the island nation may be small, it’s an international favorite for offshore banking– particularly for wealthy Russians. The tax will range from 6.75% to 9.9%, depending on how much is in the account.

“This is a clear-cut robbery,” Andreas Moyseos, a former electrician who is now a pensioner in Nicosia, told the New York Times. Iliana Andreadakis, a book critic, further added: “This issue doesn’t only affect the people’s deposits, but also the prospect of the Cyprus economy. The E.U. has diminished its credibility.”

And indeed, following the massive run on banks in Cyprus, many are concerned that a minor panic could spread to the rest of the Eurozone. After all, it has just set a precedent for taxing private bank accounts at exorbitant rates without warning.

People queue to use an ATM machine outside of a Laiki Bank branch in Cyprus. Many rushed to cooperative banks after learning that the terms of a bailout deal includes a one-time levy on bank deposits. (Photo: AP)

But first, here’s a little more background on the plan via the Associated Press:

As one of 17 nations that use the euro currency, Cyprus can to raise or lower taxes whenever it wants. Early Saturday, it secured a (EURO)10 billion ($13 billion) bailout from its European partners and the International Monetary Fund to save the banking sector and avoid bankruptcy. In return, the island nation has imposed the new tax, among other moves.

Banks have already acted to seal off the amount of the levy – a 6.75 percent tax on deposits under 100,000 euro and 9.9 percent on those above – so depositors can’t access it. Bank customers still can draw on the rest of their funds via ATM machines this weekend, although banks that usually open on Saturdays had limited hours and many said they were out of cash by the end of the day. No international transfers will be able to go through until Tuesday, since Monday is a holiday. Cyprus’ parliament is expected to meet Sunday to pass the required legislation. The deal also needs the approval of several eurozone parliaments; it’s unclear how fast they can act and what will happen to bank deposits in the meantime. [Emphasis added]

The really shocking aspect of the policy is that it targets “ordinary savers,” in the words of the New York Times. In the past, banks and shareholders have been forced to take losses, but the average person’s bank account was left relatively untouched. Italy once imposed a .06 percent tax on every bank account, but the rate was miniscule compared to what those in Cyprus are being asked to contribute.

Dutch Finance Minister Jeroen Dijsselbloem speaks with Managing Director of the International Monetary Fund Christine Lagarde at the EU headquarters in Brussels on Friday, March 15, 2013. European finance ministers are trying to complete a long-delayed bailout deal for Cyprus in a bid to keep the island nation from a bankruptcy that could rekindle the region’s debt crisis. (Photo: AP)

European officials are promising that Cyprus is a unique case and that the same tactic won’t be used elsewhere, but not everyone is convinced.

“…this is a unique situation. Just like the Greek bailout was unique; just like the Irish and Portuguese bailouts were unique; just like the bailout of Spanish banks was unique…” ZeroHedge wrote, noting that the problem never seems to get fixed.

ZeroHedge concludes its article with pointed criticism for the policy and a warning for the rest of Europe:

Congratulations Cyprus savers – you were just betrayed by both your politicians, and by Europe – sorry, but you are the “creeping impairments” in the game known as European bankruptcy. And so is anywhere between 6.75% and 9.9% of your money, which you were foolish enough to keep with your banks (where at least you were compensated with a savings yield of… 0%).

More importantly, as of this morning Europe has finally grasped that there is a 6.75% to 9.9% premium to holding physical cash in your mattress rather than having it stored with your local friendly insolvent bank.

Luckily Cyrpus is so “small” what just happened there will never happen anywhere else: after all in Europe nobody has ever heard of “setting an example“. Or so the thinking among Europe’s unthinking political elite goes… [Emphasis modified]